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From crisis to crisis: the high cost of the post-soviet institutional lock-in
Cédric Durand, Maxime Petrovski
To cite this version:
Cédric Durand, Maxime Petrovski. From crisis to crisis: the high cost of the post-soviet institutional
lock-in. SASE’s 21st Annual Meeting “ Capitalism in Crisis: What’s next? Economic Regulation and
Social Solidarity After the Fall of Finance Capitalism ”, Jul 2009, Paris, France. �hal-00407814�
SASE's 21st Annual Meeting – S
CIENCESP
OP
ARIS, F
RANCE« Capitalism in Crisis: What's next? Economic Regulation and Social Solidarity After the Fall of Finance Capitalism »
July 16-18, 2009
From crisis to crisis: the high cost of the post-soviet institutional lock-in
Cédric Durand
Associate Professor, Paris13 University,
CEMI (EHESS) and CEPN (CNRS/Paris13) - cdurand@ehess.fr
Maxime Petrovski
Paris I University, CEMI-EHESS – maxime.petrovski@gmail.com
Introduction
In this contribution, we shall try to characterise the Russian growth model the way it appears to have emerged in the 2000s, which we believe useful to explain the country’s macroeconomic successes at an earlier stage as well as the severe problems it has to face now.
The reasons for the choice of the subject are multiple. First of all, whilst numerous analyses have recently sought to understand and appreciate the impact of the crisis, its transmission channels as well as the economic prospects of various nations, the non-OCDE world has not received so much attention. This is somewhat surprising given that the majority of the post- crisis scenarios tend to ascribe the leading role to pull the world economy out of the deadly depressive spiral to the so-called BRIC countries. Among the BRICs, Russia appears to be hit most of all and it is important to understand how and why. Furthermore, the recognition of important differences among institutional set-ups in capitalist economies led to the emergence of an extremely interesting literature on the “varieties of capitalism” in the 1990s and 2000s.
But this literature has also mainly dealt with the OCDE countries. Our ambition is to pursue this analysis and shed some more light on the salient characteristics of the specific post-Soviet rent-seeking “exportist” capitalism that gradually emerged in Russia in the 2000s.
We shall begin by presenting the macroeconomic indicators of the Russian Federation between the 1998 crash and up to the recent 2008 crisis, showing their very significant improvements in practically every area (part 1). However, the qualitative aspects of the economic growth suggest asking whether one the main reasons of Russia’s economic success (high commodity prices) did not make it seriously sick with the “Dutch disease” (part 2). We shall further show that the impressive growth before the 2008 crisis was followed by a yet more impressive shock hitting the economy to the extent that very few analysts had imagined (part 3). We believe that the propagation of the crisis was amplified by the specific features of the capitalist system that emerged in Russia in the 2000s, particularly its “international regime” (part 4). We conclude our contribution by saying that the Russian model in the 2000 appeared to be intrinsically unstable before suggesting possible scenarios of finding paths to a sustainable growth model.
1. Rebound and Boom: Russian comeback in the early 2000s
The main macroeconomic indicators of the Russian economy since 1999 and until the recent global economic meltdown are quite impressive. The record would look even more spectacular against the backdrop of the economic and social catastrophe the country went through in the 1990s.
Between 2000 and 2008, Russia’s GDP grow at an average annual rate of 7% in real terms (Figure 1). After having nearly halved between 1991 and 1998, it fully recovered its 1991 level by 2007, which made Russia the world’s 6
thor 7
thlarge economy sorted by purchasing power parity, according to different sources
1.
The investment dynamics during this period – although arguably insufficient given the needs to modernise the economy – is positive as well. The investment recovers considerably after
1 According to the IMF data, Russia’s GDP in PPP was the 6th in terms of size in 2008. The World Bank and CIA estimates place Russia 7th, after Great Britain.
the 1998 financial crash and grows in nominal and relative terms at a steady pace in the 2000s reaching 22.3% of the GDP in the second quarter of 2007.
Figure 1: Russia’s GDP growth between 1991 and 2008
Source: IMF, www.imf.org
Finally, substantial increases in real wages and very reasonable unemployment rates have an undeniably strong positive effect on the living conditions of the Russian population. The annual increase in real wages during Putin’s presidential terms is about 10%, hitting the highest of 16% in 2007. As a result of this continuous progression, real wages nearly double between 1999 and 2007. Again, the contrast is stark when these data are compared to the general impoverishment of the Russians in the nineties. At the same time, the unemployment rate glided down progressively from more than 12% in 1999 to less than 7% in 2006 (Figure 2).
Figure 2: Real Wages and Unemployment in Russia before the 2008 crisis
1992 1995 2000 2003 2006
20 40 60 80 100
3 6 9 12
salaires et chômage
salaire moyen (gauche)
taux de chômage (droite - %)
% de 1991
Real wages (Left)
Unemployment Rate (Right)
Sources: Goskomstat, EBRD.
These enviable macroeconomic indicators of the Putin era have been most often explained by
skyrocketing commodity prices during the same period. Although this factor was - beyond
any reasonable doubt - extremely important, linking Russia’s macroeconomic performance to
the rise of commodity prices alone would be a simplification. The developments in the
Russian economy since the 1998 financial crisis suggest that the high rates of economic
growth the country enjoyed since 1999 were not based on exactly the same factors and
policies. We think it useful to distinguish between at least two periods in the recent economic
history of Russia since the 1998 crash. The first one runs from the end of 1998 until
approximately 2003, when the Russian industry benefited primarily from the stimulating effects of the ruble devaluation. The second one starts in 2003-2004, when economic growth becomes driven primarily by high commodity prices and redistribution of export windfalls. It is also during this second period - corresponding roughly to Mr. Putin’s second presidential term - that the State gets much more actively involved into the economy and the policies of the Russian government become much more “interventional”.
1.1. 1998-2002: reaping the benefits of the ruble devaluation
The 1998 financial crash results in an extremely strong devaluation of the national currency.
The speed with which the seemingly moribund industrial sector manages to respond to this devaluation is quite remarkable. The growth of industrial output in Russia is already observable in the last quarter of 1998 (Figure 3), i.e. in the aftermath of the financial crash.
This might appear astounding and perfectly counterintuitive but the reason of this reactivity is the peculiar form of adjustments of the Russian firms to the economic conditions of the nineties. Non only are they completely disconnected from the predatory financial sector (which explains why its crash has no effect on the industry), but they also tend to keep their workforce and collective competencies available despite the ever-shrinking demand, instead of laying-off their workers and/or closing down the sites as orthodox models would suppose them to [Petrovski, 2004]. The ruble devaluation makes locally manufactured goods competitive inducing significant import substitution, which turns out to be immediate: the only thing Russian firms have to do is to increase their capacity utilisation and ship goods to market. Capacity utilisation rate of the Russian enterprises goes up from about 50% before the crisis to nearly 70% two years later (RECEP, 1998-2003). Higher rates of capacity utilisation contribute, in turn, to productivity growth and improvement of competitiveness, thus creating a “virtuous circle”.
Figure 3: Industrial output in Russia after the 1998 economic crisis Industrial output in Russia (1997=100)
80 85 90 95 100 105 110 115 120 125
1998 Q1 1998 Q2
1998 Q3 1998 Q4
1999 Q1 1999 Q2
1999 Q3 1999 Q4
2000 Q1 2000 Q2
2000 Q3 2000 Q4
2001 Q1 2001 Q2
2001 Q3 2001 Q4
2002 Q1 2002 Q2
Source: RECEP, Russian Economic Trends, 1999-2003.
Strong growth of industrial output in Russia continues at a steady pace to reach 120% of its
1997 level by mid-2002. Even more interesting is the sectoral dynamics, with the fastest
growth during this period occurring in chemicals, machine-building, wood, paper and wood
products, and food industry.
The period running from 1999 to 2003 is also characterised by a set of policies that differ considerably from what will follow later. President Putin himself described at the time his political agenda as that of ‘pragmatic liberalism’. The reforms of his first presidential term appear to confirm this statement: a new Tax Code simplifying and reducing taxes on the business and the rich, a reformed Labour Code authorising easier lay-offs to make labour market more flexible, rather orthodox macroeconomic policies.
1.2. 2003-2008: commodities boom and “Golden Years”
However, as Figure 4 shows, the competitive advantage derived from the ruble devaluation in 1998 tends to vanish progressively by 2003-2004, with industry competitiveness index
2going down sharply as the ruble real exchange rate goes up. This corresponds to the period when the prices of commodities that Russia exports (hydrocarbons as well as ferrous and non-ferrous metals, in the first place) start reaching extremely high levels. In this respect, it is important to emphasise that while oil prices double in 2000 as compared to 1999, they actually fall between 2000 and 2002. It is only in 2004 that they really start skyrocketing.
Figure 4: Real exchange rate and industry competitiveness
Source: Ministry of Economic Development and Trade [2008], presentation of the director of the department of macroeconomic analysis A. Klepach.
By 2003-2004, ruble appreciation combined with soaring commodity prices change the macroeconomic landscape to a considerable extent. The economic growth continues to be strong but it is no longer based on a favourable exchange rate and import substitution, but on extremely high commodity prices (hydrocarbons and metals) as well as on the redistribution of export windfalls.
Moreover, precisely during this period, the economic policy of the Russian government takes a nationalistic ‘developmentalist’ turn, which resembles the post-war trajectories of certain Asian and European countries [Durand, Petrovski, 2008]. This is reflected for example in significant extension of public property, sometimes by using fiscal and environmental
2 This is a UNIDO index based on two sets of components, namely industrial development indicators and competitive industrial performance.
pressures and leaving no choice to the owners of the assets concerned, but also by acting through state-owned companies that buy (entirely or partially) formerly private businesses. In addition, no serious analyst would fail to notice the deployment of various industrial policy instruments or the fact that Russian investment abroad is being actively encouraged and supported by the government. Ostensibly, the objective of this voluntarism is to preserve the autonomy of the Russian economy and to use the rent from the export of natural resources to modernise the largely obsolete industrial base.
2. Is Russia a victim of the “resource curse”?
The drivers of the Russian economic growth in the 2000s, the apparent importance of hydrocarbon exports as well as the political evolution of Russia during the same period brought to the forefront the hypothesis of the “resource curse”. The main questions seem to be: does Russia suffer from it at all? If this is the case, how badly does it? How can these negative effects be mitigated? What are adequate policy responses to the problem?
2.1. An economy heavily based on natural resources
In order to understand the existing structure of the Russian economy, one has to deal first with certain difficulties related to the data. The official statistics, while technically correct, paint a somewhat distorted picture, because a significant share of the value added generated by the oil and gas sector in Russia is not taken into account due to the prevalence of transfer pricing [Kuboniwa et al., 2005 ; World Bank 2004 a and b ; Gurvich, 2004, Ellman, 2006]
3. Indeed, according to the data compiled by Goskomstat, extraction industries account for less than 10% of GDP in 2008 (Figure 5), and about 18% of industrial output in 2004 (the latest data available, Figure 6).
Figures 5 and 6: The structure of the Russian GDP and of the industrial production
The structure of the Russian GDP in 2008
Wholesale and retail trade
23%
Extraction industries
10%
Manufacturing 18%
Utilities supply 3%
Construction 7%
Transport and communications
10%
Financial services
16%
Public services 13%
The structure of the industrial production in 2004
Non-ferrous Metals
8%
Chemicals 6%
Ferrous Metals 12%
Fuel 23%
Electricity 11%
Food 13%
Other 8%
Machinery 19%
Source: Goskomstat.
So, at first sight, the ‘resource curse’ does not appear to be an issue. However, exports of oil, oil products and natural gas alone represent 18.5% of GDP, which raises the question of their coherence with the former figure. Adjusted data suggest that in reality, the contribution of oil and gas to the Russian GDP is 24.1% in 2000 and 20.5 % in 2001 as against 7.8% and 6.7 % respectively, according to the official statistics [Kuboniwa et al., 2005]. According to the World Bank, about 49% of industrial added value comes from the hydrocarbons against 29%
in the official statistics [2004 a and b]. Whilst it is true that these estimates are not very recent,
3 This point is summarised in C. Ruehl and M. Schaffer, ‘Potemkin's GDP’, Wall Street Journal, February 19 2004.
http://go.worldbank.org/LGWSRQDNF0
there is no serious reason to believe that the measurement of the contribution of the hydrocarbons to the Russian economy, has considerably improved ever since.
The problem of the dependence of Russia on natural resources is better understood when looking at the international specialisation of the country. A rapid comparative outlook (Figure 7
4) shows that despite its size, Russia is strongly dependent on foreign trade. The average Trade/GDP ratio is 54.2% between 2005 and 2007, with exports being heavily dominated by hydrocarbons (72.5 % of the total exports in 2007).
Figure 7: Comparative trade profiles
20 30 40 50 60 70 80 90 100 110 120 130 140 150 160
0 10 20 30 40 50 60 70 80 90 100
Brazil
China India
Iran
Japan
Mexico Russia
Saudi Arabia
US
Venezuela
Indonesia
Viet Nam
Turkey South Korea
Chile
Pakistan Argentina
S-Africa
Ukraine Nigeria
Algeria
Kazakhstan
Canada Norway
Australia
Gabon
insertion in international trade
selected countries - WTO trade profiles
trade of good and services / GDP
fuels and mining products (% of 2007 X°)
Source: WTO trade profiles, 2009
The picture would be even more impressive if one takes into account all the exports that depend, in one way or another, on natural resources. These include: i) all the products directly related to energy (such as oil products, coal and electricity); ii) ferrous metals because the steel industry benefits considerably from the availability of local minerals, coal and cheap energy; iii) non-ferrous metals whose competitiveness relies heavily on the available local minerals (nickel and gold) and/or cheap Siberian hydro-electrical energy (aluminium); iiii) chemicals that are derived from natural gas (such as fertilizers). In this case, the conclusion will be that nearly 90% of exports are somehow resource based (Figure 8).
4 The sample has been compiled so as to show the position of Russia as compared to various trade profiles of big and medium sized countries: the BRICS, exporters of natural resources, exporters of manufacturing goods, developed economies, transition economies.
Figure 8: The Structure of the Russian Exports
Structure of the Russian Exports in 2008
Chemicals
3% Other
3%
Energy 78%
Machine- Building
5%
Metals 11%
Source: Russian Customs, Eco-Win, 2008.
2.2. “Resource curse”, negative lock-in, and the problem of persistent dependency
The dependency perspective focuses on the reproduction of asymmetrical relations between core and peripheral countries in the capitalist world. Furtado [1972, 1997] argues that under- development is a sub-product of the industrial revolution: modern consumption patterns spread rapidly worldwide whist new production technologies that induce these consumption patterns are mainly concentrated in the most advanced economies. The result of this asymmetry between consumption habits and the localisation of production capacities is that less developed economies are locked in a state of dependency.
The “Russian resource curse” hypothesis, which has received a growing attention in recent years in the West [Aslund, 2005; Desai, 2006] and in Russia [Smirnov, Arbatov, 2004; Guriev, Sonin, 2008] may be seen as a peculiar form of this process. Modernisation and dependency co-exist, since consumption patterns can be funded by export windfalls whilst the development of high added value sectors may remain weak. Numerous empirical studies suggest that countries generously endowed with natural resources tend to be underdeveloped and enjoy slower rates of GDP growth [Karl, 1997; Papyrakis, Gerlagh, 2004; Sachs, Warner 1995; Pessoa, 2008], even after adjusting the results to fluctuations in commodity prices [Sachs, Warner, 2001].
In spite of this strong evidence, the “resource curse” is not inevitable. Resource-based development can also be a powerful driver to modernise the economy, as it was, for example, in the US in the nineteenth century. This appears all the more true if one considers various lines of theoretical arguments found in the literature in support of this thesis, suggesting the existence of significant room for manoeuvre to pursue adequate policies and mitigate adverse effects of the “resource cruse” [Ahrend, 2006].
Potential vulnerability in case of external shocks is the most obvious problem. As abundant empirical evidence suggests, crises in emerging markets are most often caused by severe shocks arising from sharp falls of prices of the country’s main export commodities.
Obviously, economies dependent on exports of natural resources are particularly exposed to this risk [Narain et al, 2003].
A second range of arguments is based on the hypothesis that “easy riches lead to sloth”. In a
nutshell, the abundance of natural resources suppresses the need to compete internationally in
manufacturing sectors (and in some cases, in agriculture), which leads to the persistence of
specific institutional weaknesses. Auty [1994] distinguishes four aspects of the phenomenon :
“the richer the natural resource endowment then, first the longer lax macro policies are tolerated; second, the less pressure to achieve rapid industrial maturation; third, the longer rent-seeking groups are tolerated (and the more entrenched they become); and fourth, the greater the likelihood of decelerating and more erratic economic growth”.
Following the “Dutch Disease” approach, the “resource curse” can also be linked to the
“crowding out” effect that the expansion of commodity exports has on the development of manufacturing sectors [Ellman, 1977; Grégory, 1976; Corden, 1981 and 1984; Corden, Neary, 1982; Van Winjbergen, 1984; Sid Ahmed, 1987; Sachs, Warner, 2001]. The main point here is not the negative effects on investment and employment in the short and medium term but rather the long-run negative impact of such an international specialisation on manufactured tradables.
In fact, manufacturing sectors tend to be more competitive and innovative as compared to other sectors and are characterised by technological spill-overs [Krugman, 1987]. As comparative advantage evolves over time through learning-by-doing, The “Dutch Disease”
may well lead to a negative lock-in resulting in persistently lower productivity and GDP growth rates. In low and middle income countries, a weaker exchange rate can off-set two kinds of disadvantages that affect local production of tradables much more than that of non- tradables [Rodrick, 2008]. The first one stems from institutional weaknesses and more radical contract incompleteness in these countries. The second one is related to market failures that hinder structural reforms and economic diversification. Consequently, an undervalued exchange rate fosters the growth of tradables and, as a second best solution, accelerates structural change and learning processes. Conversely, an overvalued exchange rate acts as a tax on local production of tradables. It impedes growth i) by reducing incentives to invest in tradable goods since local production loses competitiveness [Prasad et al, 2007] ; ii) but also, indirectly, by making the country miss opportunities to improve its institutions and pursue more efficient policies that could have emerged along with the development of manufacturing sectors.
2.3. How seriously is Russia sick with the “Dutch Disease”?
There have been several recent studies addressing the issue of ‘Dutch Disease’ in Russia. At the macro level, Desai’s estimate [2006] suggests that continuing ruble appreciation seems to have some negative effect on the manufacturing sector between 1999 and 2004 but the result is statistically non-significant.
Ollus and Barisitz [2007] conducted an analysis of the Russian imports from 25 countries of the European Union and found more convincing evidence of the phenomenon. Their study shows that in clothing industry but - more importantly - in machinery and equipment, imports grow faster than does the domestic production. The trend is the same in chemicals, plastics, paper, publishing and wood products. Not surprisingly, imports do not appear to threaten domestic production in mineral extraction and metallurgy.
This is not the case in the food industry either, but this sector benefits from one of the highest levels of trade protection in Russia. More unexpected is the fact that in the area of electric, electronic and optical equipment, Russian firms seem to resist well to foreign competition. Of course, the interpretation of these results is subject to some caution: for example, the rise of imports in machinery and equipment may be related to the modernisation of obsolete industrial capacities through investment. However, the overall picture appears to confirm the thesis of incipient des-industrialisation.
A recent IMF working paper [Oomes and Kalcheva, 2007] finds that Russia has all the
symptoms of the “Dutch Disease”, that include: i) real exchange rate appreciation, ii) slower
manufacturing growth, iii) fast development of the service sector, iiii) high growth of wages.
However, the authors’ conclusion is that the diagnosis of the “Dutch Disease” in Russia is yet to be confirmed. In particular, they point out that slower growth in the manufacturing sector as compared to the service and resources sector may be a “natural transition phenomenon”, given that the manufacturing sector was overdeveloped during the Soviet period whilst the service sector was underdeveloped. In addition, they argue that some des-industrialisation in relative terms may also have been “natural” given the growth of real wages: as households get richer, their demand tends to shift away from goods to services.
An OECD study [Ahrend, de Rosa and Tompson, 2007] gives a more nuanced appreciation of the recent macroeconomic dynamics in Russia. The authors compare Russia and Ukraine, trying to neutralise the contribution of natural resources over the period between 1997 and 2005. Their study shows that Russia’s manufacturing sector had been completely destroyed in comparison to Ukraine’s. In addition, productivity remains significantly higher in Russia, even if productivity growth had been faster in Ukraine. The authors put forward several explanations but the main factors appear to be the appreciation of the real exchange rate and the relative protection of the Russian industry from foreign competition. This allowed Russian manufacturers to increase their prices above international levels, in particular for non- tradables. Securing higher prices for their products permitted Russian industrial enterprises to pay larger wage bills. Thus, relative protection against foreign competition mitigated the crowding-out effect and limited further negative consequences of the “Dutch Disease” in Russia.
However, this optimistic analysis is somehow contradicted by the evolution of Russia’s foreign trade. There is a loss of competitiveness of the Russian manufactured tradables in terms of unit labour costs as well as in terms of added value. Between 1997 and 2004, Russia enjoyed growing revealed comparative advantages (RCA) in hydrocarbons (oil, oil products and gas), wood, pulp and paper, as well as energy intensive products, such as non-ferrous metals, fertilizers, and steel. At the same time, Russia's comparative disadvantages grew worse in industrial machinery and equipment, electronic consumer goods, car manufacturing and medicinal and pharmaceutical products. By and large, as living standards rose, Russia imported more goods than it was importing in the mid-nineties. At best, this would indicate that the sectors manufacturing these goods were either non-existent at the start of the transition or had virtually disappeared by 1996-97.
Figure 9: Relative Structure of the Russian GDP
Relative structure of the Russian GDP
0 10 20 30 40 50 60 70 80 90 100
2002 2005 2008
Agriculture and fishing Mining and quarrying Manufacturing Non-tradables
Source: Goskomstat, 2009
A somewhat provocative interpretation of these results is also possible. While limiting
competition, rent-seeking could have acted as a partial antidote against the devastating effects
of the “Dutch Disease” on the Russian industry. The developments during the most recent period, when oil prices skyrocketed, could give some credit to such a hypothesis. Due to the aforementioned methodological problems, it is difficult to put a clear diagnosis regarding the
“Dutch Disease” on the basis of the aggregate sectoral data available (Figure 9).
But it is obvious that the growth rate of the key non-tradables is substantially above that of the output (Figure 10). Moreover, as we have seen earlier, Russian real wages rose substantially in 2000s, whilst CPI increased considerably as well, even if these developments might not be related exclusively to high hydrocarbon export revenues (Figure 11). Such symptoms appear to support the diagnosis of the “Dutch disease”.
Figures 10 and 11: Activity index for key non-tradables and Inflation and export revenues from hydrocarbons
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
-10 -5 0 5 10 15 20 25 30 35
Activity index for some key non-tradables
volume CPPY - EcoWin
Privates services Retail trade turnover
Construction Total Output
%
2000 2001 2002 2003 2004 2005 2006 2007 2008 0
7,5 15 22,5
0 25 50 75 100 125 150 175 200 225 250 275 300 325
Inflation and exports revenues from hydrocarbons
CPI Gas and oil exports
(blns USD)
%
Sources: Goskomstat, CBR, Eco-Win.
At the same time, the growth rates of some manufacturing industries are quite surprising.
High-tech manufactured goods and machinery are among the fastest growing, while oil, mining, basic metals and chemicals are growing at a much slower pace. The only sector where a clear trend towards des-industrialisation is noticeable is textile. The manufacturing sector pursued a rapid growth in comparison with oil sector and non-tradables. This occurred despite higher wages and substantial appreciation of the real exchange rate. However, the country’s international trade profile has been deteriorating with growing specialisation in energy products and basic manufacturing on the one hand and increasing dependency on manufactured goods, particularly in automotive industry but also in high-tech products, such as computers and telecommunications, on the other hand (Tables 1 and 2).
Table 1 and 2: Russia’s Revealed Comparative Advantages in 2001 and 2007 expressed in thousandths of GDP
2001
Strong points Weak points
Crude oil 59,853 Cars -8,1665
Non-ferrous metals 22,608 Specialised machinery -7,7529
Natural gas 21,803 Computers & accessories -7,3649
Oil based products 18,365 Pharmaceuticals -7,2739
Other 14,929 Telecom equipment -7,2596
Steel 8,5063 Other agricultural products -7,0719
Fertilizers 3,7819 Sugar -6,0225
Basic chemicals 2,9784 Leather -5,8097
Coal 2,8811 Plastics -5,6907
Edible agricultural products 2,603 Meat & Fish -5,3025
2007
Strong points Weak points
Crude oil 56,291 Cars -21,349
Natural gas 35,451 Computers & accessories -8,399
Oil based products 22,853 Telecom equipment -7,7514
Non-ferrous metals 10,791 Specialised machinery -7,438
Steel 5,5422 Other agricultural products -6,1573
Edible agricultural products 4,7636 Utility vehicles -5,5102
Coal 4,1702 Plastics -5,3988
Other 4,1374 Hardware -4,9602
Fertilizers 3,875 Leather -4,8122
Basic chemicals 2,906 Electric equipment -4,761
Source: CEPII - Chelem estimates, 2009
Moreover, Russia has persistently negative revealed comparative disadvantages in most consumer goods. All this suggests an increased dependence of Russia on foreign countries.
This dependence is defined here as discrepancy between consumption patterns and production patterns: to simplify somewhat, increasing imports have been funded by increasing exports of natural resources.
In summary, Russian economy before the recent crisis is characterised by a small high added- value manufacturing sector outside of the basic manufacturing industries whose competitiveness is strongly dependent on natural resources. Russia’s terms of trade suggest that the specialisation of the country as an exporter of primary goods has even worsened during the recent period while its dependence on imported manufacturing goods has increased. This evolution, along with the strong dynamism in non-tradables, such construction, financial services and domestic trade, is clearly symptomatic of the ‘Dutch Disease’. In this context, the resilience of domestic manufacturing output seems an anomaly.
Our tentative hypothesis is that this could be related to somewhat restricted competition on the internal market due to tariff and non-tariff barriers to trade and also the first consequences of the emerging industrial policy
5. It also suggests that so-called rent-seeking strategies and the embeddedness of manufacturing activities in private-public networks may have protected Russian firms from the most ruinous effects of the ‘Dutch Disease’ resulting in total destruction of industrial capabilities. This is a crucial point since the literature suggests that the preservation of the national industrial base is a key element for long-run development prospects.
3. 2008-2009: a new major economic crisis
Just like after the 1998 economic and financial crash, the evolution of the Russian economy in the aftermath of the 2008 crisis has been somewhat counterintuitive. This time however, the surprises have turned out to be very unpleasant. The strong macroeconomic fundamentals seemed to indicate that the Russian economy was robust to face extremely adverse conditions.
First of all, Russia’s growth rates were high and driven to a large extent by internal demand (household consumption, in particular). In addition, financial sector was relatively weakly developed, which might be seen as a disadvantage in normal conditions but appeared rather as a risk-reducing factor given the nature of the global financial crisis. Furthermore, the country’s foreign reserves before the crisis were the world’s third largest, whilst Russia’s public debt was very low. And to crown it all, the country continued to run significant budgetary and trade surpluses and had accumulated significant “Stabilisation Fund”.
5 For example, machine-building industries could benefit from oil and gas industry orders placed to support them. At the same time, centralising ship-building and aerospace industries under public control could have a positive effect on the output of their Russian subcontractors [Durand, Petrovski, 2009].
3.1. A brief comparative outlook
Despite all this, not only the impact of the crisis was particularly violent but Russia seems to be impacted - for the time being at least – more than the vast majority of countries. The recent OECD projections say that Russia is to go through a deeper recession in 2009 than most developed and emerging nations.
Figure 12: OCDE projections of GDP growth in 2009
-8 -6 -4 -2 0 2 4 6 8 10
US Japan Germany Franc e Italy UK Canada OECD China India Brazil Russia
Source: OECD, June 2009
6In addition, Russia’s economic downturn contrasts unpleasantly not only with China’s and India’s continuing dynamism, but also with the Middle East oil-monarchies whose growth should remain positive in 2009, according to the World Bank’s recent estimates [IMF, 2009]
7. The OECD projections are not the worst-case scenario. The latest World Bank assessment paints an even bleaker picture with possible 7.9% GDP contraction in 2009. Suffice it to say that the real GDP contraction in Russia in the first quarter was 9.8% [Goskomstat, 2009] and the prospects for the rest of year look very uncertain despite the current rise of commodity prices, particularly hydrocarbons, since April and May economic data were again highly negative.
Dramatic as it appears however, the Russian economic slump is not an exceptional phenomenon in terms of magnitude. But instead of the OECD, BRICs or oil-producing countries, one has to look in the post-Soviet family to find similar and even more spectacular orders of GDP contraction. For example, Ukraine’s GPD is expected to shrink by 12 to 14%
in 2009, while Lithuania’s output should be down by 13% and Latvia’s by 19%.
3.2. Stylized facts at the sectoral level
First of all, let us look at the sectors that are behind this impressive output contraction in Russia before turning to the qualitative explanations and the transmission channels of the global economic crisis.
As Table 3 illustrates, all sectors report negative dynamics in the first quarter of 2009. The tradables shrink strongly (-14.4%) as a result of deteriorating external environment and consumer confidence. The contraction is the most dramatic in manufacturing (-23.5%)
6 We are thankful to Geoff Barnard from OCDE for having communicated us the most recent OECD estimates.
7 IMF, May 10th 2009, Middle East and North Africa Department.
reflecting the weak domestic demand and particularly radical cuts in enterprise investments.
Extraction industries and agriculture, while going down as well, stay at quite reasonable levels, given the general context. The damage also appears less pronounced in non-tradables (-6.2%), where the contraction is very severe only in construction (-20.9%), with trade, transport & communication and utilities resisting much better.
Table 3: GDP dynamics in Russia by sector
Sources: The World Bank, June 2009
The most recent statistical data indicate that the decline in tradables has been worsening in the second quarter of 2009, with growth rates of -25.1% and -23.7% in April and May respectively on year-to-year basis. The contraction in manufacturing between January and April 2009 is 22% as compared to the same period of the previous year. The most serious declines are reported in electro-optical equipment (-42%), transport and transportation equipment (-36.4%) and machinery (-34.3%). In certain industries, the contraction is simply staggering: car production between January and May 2009 is only 38% compared to the same period of 2008, the output of trucks stands at 29% whilst excavating equipment is reported at just at 12% of its 2008 level [Goskomstat, June 2009].
3.3. Causal mechanisms of crisis development in Russia
The question is obviously why the deterioration of the Russian economy has been so spectacular while Russia’s fundamentals appeared to suggest that it was sufficiently robust and – in any case – much netter equipped to face the crisis than many other countries. In our view, three main factors should be emphasised: drastic fall of commodity prices, imported credit crunch, and impressive capital flight. These factors seem to have been aggravated by an inadequately tight monetary policy.
The first transmission mechanism is obvious and is imposing itself: a significant part of the shock came from the drastically falling commodity prices on which the country remains highly dependent. This would confirm the common wisdom that Russia is nothing more than a “colossus on hydrocarbon legs” to which one should probably add a couple of crouches made of ferrous and non-ferrous metals. There is no need to resort to econometric regressions to affirm that there is a seemingly strong link between oil prices and the Russian industrial production (Figure 13).
Peaking at 147 US dollars per barrel, the oil price went under 37 dollars at its lowest in
December, which made the proceeds from exports of crude oil and diesel fuel fall by 42% in
the last quarter of 2008 as compared to the third quarter. At the same time, steel prices went
down considerably and the slumping demand on foreign markets - on which Russian steel
manufacturers are particularly dependent
8- resulted in the contraction of the sectoral output of more than 44% in the last quarter 2008. Although it did go up somewhat in April and May, it still recorded a 29% drop between January and May 2009 on year-to-year basis. Despite RusAl’s serious financial problems, the output of non-ferrous metals appears less affected, even if aluminium export revenues declined by about 9% with comparable rates of output contraction (-8%).
Figure 13: Manufacturing in Russia versus oil price
Oil price Manufacturing in Russia
Per barrel
Source: Coface, Yves Zlotowski’s presentation, May 2009
However, it is not so much about what happened to the exporters themselves but rather about their structuring role in the Russian economy. The falling commodity prices do not only affect commodity producers, they hit badly all the companies dependent, in one way or another, on oil, gas and metal mastodons’ activity and investments. It is worth noting the Russian oil industry does not seem to suffer that much. According to the most recent statistics, oil extraction and transformation between January and May 2009 remained, roughly speaking, at their 2008 levels. Although natural gas output contraction was much more significant (-20%
between January and May), Gazprom still has considerable resources and strong support of the public authorities to face the current crisis. The problem is what happens to the resources generated by hydrocarbon exports and recycled in the Russian economy. In the context of global financial crisis, oil companies, Gazprom, steel and non-ferrous metals manufacturers were desperately looking for cash, which made them seek to improve their working capital figures, as well as to reduce dramatically their investment programmes. All this led to record declines in the output of investment goods manufacturers.
This brings us to the second crucial mechanism of transmission of the global crisis in Russia, which is the particularly acute credit crunch imported from the international financial markets starting October 2008. Contrary to what happened in 1998, the problem did not come from the public but from the private debt this time. Just like their Western counterparts, Russian banks and businesses were involved in the process of “financial optimisation”, which, in the context of a huge bubble, suggested the idea of “returning cash to the shareholder” through either dividends or share purchase programmes and borrowing heavily cheap money on international markets. Financial optimisation efforts might not have been the only reason, since endemic insecurity of property rights, ruble appreciation, as well as restrictive monetary policy of the Russian authorities whose priority was to curb inflation, might have also
8 Severstal and Novolipetsk steelworks had more than 50% of their output exported in 2008 [Sapir, 2009].
encouraged banks and enterprises to look for funds abroad [Sapir, 2009]. As Figure 14 demonstrates, whilst the public debt is going down progressively since the beginning of the 2000s, the private debt is, on the contrary, exploding and reaching 500 billion USD by September 2008.
Figure 14: Russian public and private debt
government enterprises banks
Coface, Yves Zlotowski’s presentation, May 2009
As the movement of panic, falling oil prices and catastrophic expectations after the bankruptcy of Lehman Brothers started producing their disastrous effects on liquidity, Russian enterprises and banks, badly needing refinancing, could not find any. And their refinancing needs were considerable: orderly payments for the last quarter 2008 alone were estimated at 72 USD billion [World Bank, 2009]. The doubts about the health of the financial system led to the virtual freeze on the Russian interbank market in the last quarter of 2008 stopping de facto any lending activity. This is when big export enterprises started desperately looking for cash by reducing their stocks, delaying the payment of their bills, slashing their investments and output, some of them finding themselves on the verge of bankruptcy
9.
The third transmission channel is directly related to the previous one. The generalised panic made international investors massively desert Russia. This is reflected in the impressive capital outflow of 130 USD billion during the last quarter of 2008. The movement continued, at a lesser magnitude, in the beginning of 2009 (Table 4). This capital flight put extraordinarily strong pressure on the national currency and contributed to the stock-market crash, more important in Russia than in the rest of the world, leading to further ruble depreciation, still more negative expectations and so on.
Table 4: Net Capital Flows in Russia in USD billions
Source: World Bank, June 2009.
9 The situation was particularly dire for the aluminium producer RusAl that had to find 7.4 USD billion to pay its international creditors. RusAl was one of the first big Russian companies to benefit from VneshEcokomBank’s (VEB) loan of 4.5 USD billion. « Русал получил отсрочку по уплате долга в 7,4 миллиарда долларов » (RusAl has managed to postpone the payment of its 7.4 billion dollar debt), the 6th of March 2009, http://www.lenta.ru/news/2009/03/06/rusal/
The capital flight was an important factor contributing to the virtual freeze of credit in Russia, be it to enterprises or to households. In this respect, one should note that the expansion of credit to households observed since 2005 was very rapid and quite spectacular. Whilst Russian households were still far from having the same debt/revenue ratios as compared to their Western counterparts, the expansion of credit was becoming an important driver of domestic demand, notably for cars and homes. Its virtual stoppage by the end of 2008 was certainly among the reasons behind the enormous declines of output reported by car industry (although negative expectations and inventory minimisation cannot be neglected either) and construction.
Finally, these factors seem to have been aggravated by an inadequately tight monetary policy of the Central Bank pursued from the beginning of the crisis. At the moment when nearly all central banks were seeking to ease credit conditions for the financial sector by reducing their interest rates, the Russian monetary authorities raised theirs from 11% to 13%. Obviously, the objective was to stabilise ruble, curb inflation and stop capital flight. While the efficiency of these measures is open to doubt, they undeniably contributed to the virtually total freeze of credit to real sector and had a clearly depressing effect on activity [Sapir, 2009].
This tight monetary policy, which was somewhat softened in the end of April, appears to be at odds with the ambitious budgetary stimulus programme announced by the Putin government.
As Sapir [2009] argues, there is an apparent contradiction between the highly restrictive monetary policy epitomised by the recently announced intention to withdraw 850 RR billion (25 USD billion) from circulation in May-June 2009, and the ambitious budgetary stimulus programme pouring 1.6 RR trillion (47.5 billion USD) into the economy, with 60% of this package scheduled to be spent before July
10.
Figure 15: Budgetary stimulus effort by country in 2009 (as announced in March 2009)
16,2
14
11,7 11,7
5,7 5,5
2,6
1,3 1,1 0,8
9,1
0 2 4 6 8 10 12 14 16 18
China Brazil Hungary Japan Russia US Poland Germany France GB India
% du PIB
Source: Sapir, 2009, CEMI-EHESS
To the budgetary stimulus proper, one should add the generous assistance package offered to the troubled financial sector to avoid its collapse and provide liquidity to banks
11. All this puts
10 It is clear today however that this has not been the case.
11 The efficiency of the measures to ease credit conditions (preferential loans, public guarantees offered for loans, partial compensation to enterprises of the interest paid etc.) leaves to be desired, which is proved by a new 25% contraction of credit to real sector in May reported by Goskomstat. On the 25th of June, when speaking publicly during a governmental meeting, Mr. Putin basically ordered that banks make loans to the real sector.
“I’m addressing myself to banks with public shareholding… I believe that given [recent] governmental decisions, the credit portfolio should be increased by 150 billion rubles in June, plus 150 billion more by the 1st of September, which makes it 300. By the 1st of October, the increase should be between 400 and 500 billion…
Before you put things on the rails for this to happen, I ask you to forget about your summer vacations”. N.
the total anti-crisis effort of the Russian government at a quite considerable level as compared to the majority of the OECD and BRIC countries (Figure 15).
But despite the ambitious interventionist stance of the Russian government, analysts are quite sceptical about these measures yielding a significant contribution in terms of growth. The current estimates show that the impact of the public expenditure in 2009 should remain limited (Figure 16). Of course, it will depend upon several factors hard to predict at this stage, among which the efficiency and speed of the implementation of public programmes, their positive multiplying effect on various sectors and, of course, the level of commodity prices in the coming months with its determining impact on the domestic demand and investor confidence.
Figure 16: Contribution to the Russian economic growth
Investment
Household consumption Public expenditure
Other
Source: Coface, presentation, May 2009
Another extremely important factor to take into account is the consumption of households.
Whilst it has been one of the main drivers of growth in recent years, the current situation on the labour market can affect it in a highly negative way.
3.4. Unemployment: severe adjustments and come-back of some 1990s practices
The dramatic declines in output reported in the first quarter of 2009 have induced sharp adjustments on the Russian labour market. The unemployment rate jumped to 10% (ILO definition) by the end of March, which is 2.2% more than three month earlier and nearly the double of the May 2008 figure (5.4%) (Figure17). The slight improvement registered in May is ascribable to seasonal factors [Goskomstat, June 2009].
Although the economic situation in Russia exercises strong pressure on real wages, their reduction has remained - for the time being at least - rather limited (-2%). However, a significant increase in wage arrears starting the end of 2008 should be noted. Although wage arrears fell slightly in March-April, preliminary numbers in May indicate a new rise [Goskomstat, June 2009].
Bianova, “Банкиры проведут отпуск на портфелях” (Bankers to spend their vacations on portfolios), the 26th of June 2009,http://www.gazeta.ru/financial/2009/06/29/3216698.shtml
Figure 17: Unemployment rate in Russia
Unemployment rate in Russia (% ILO definition)
5 6 7 8 9 10 11
Dec2006 Dec2007
May2007 Dec2008
Jan2009 Feb2009
March2009 April2009
May2009
Source: World Bank, Goskomstat, June 2009.
While their absolute volume remains limited (stock of 8.8 RR billion or 284 USD million), they might become an important issue in some mono-industrial towns, sometime sparkling social unrest (World Bank, 2009)
12. The comeback of this practice, which appeared just several months ago as an unfortunate atavism of the 1990s, is a curious phenomenon illustrating the dire liquidity situation in which many Russian enterprises found themselves.
The loss of employment in Russia 2009 projected by the World Bank (Figure 18) shows the strongest destruction in relative terms is to occur in construction and “other” sectors. It is worth noting that unemployment generated by manufacturing, while remaining high in absolute terms, does not reflect the magnitude of the output contraction in relative terms. As we have seen before, manufacturing is likely to contract by 22-25% in the first half of 2009 as compared to the same period of 2008 while its loss of employment should increase by just 8,5%. A tentative explanation of this phenomenon is attempted in the next section.
Figure 18: Projected loss of employment in Russia in 2009
Source: World Bank, June 2009.
12 The recent social unrest in the town of Pikalyovo, when Prime Minister Putin had to intervene directly to settle the conflict, was triggered partially by the problem of wage arrears. “В.Путин потребовал погасить все долги перед рабочими Пикалево” (V. Putin demanded that all debts to Pikaliovo workers be paid), the 5th of June 2009, http://top.rbc.ru/society/04/06/2009/308033.shtml
4. Russian post-soviet “exportist” capitalism
The previous developments bring us to the last section where we try to characterise the Russian post-Soviet capitalism in a more systematic way. In our view, there appears to be some coherence between the Russian development trajectory in the 2000s and the way the country in affected by the current global financial and economic crisis in 2008 and 2009. The factors that contributed to Russia’s relative success before turn out to be its main weaknesses in the present context.
4.1. Enlarging the “Variety of Capitalism” approach
Since the beginning of the 1990s, a rather extensive literature on “the varieties of capitalism”
has emerged and steadily grown. Albert [1991], Crouch and Streeck [1996], Hall and Soskice [2001] to mention just a few, have emphasised persistent and important differences – not to say divergences – in crucial institutional arrangements between what can be roughly termed
“Anglo-Saxon” and “European continental/Japanese” models
13. Amable [2005] goes further and proposes a multi-dimensional approach, less centred on the business firm, which results in a taxonomy of five stylised types of modern capitalism.
However, the general trend observable in this literature is to focus primarily on the OECD countries and more specifically on the “Western” countries
14. The rest of the world is hardly ever explored. One of the main reasons is probably the position of less developed nations in the global economy, which makes it hard to carry out analyses with traditional analytical tools, particularly without considering the international regime as the centrepiece of the economic system heavily affecting all the other institutions and policies. To be fair, abundant literature on “developmentalism” has addressed similar issues [Johnson, 1995; Amsden, 1989;
Wade, 1990] but these studies do not seem to have been largely influential in the “varieties of capitalism” approach.
Some scholars from the French “Regulation School” (Ecole de Régulation) have attempted to understand the success of East-Asian newly industrialised economies in terms of institutional variety. For example, Jessop and Sum [2006] point out that such an approach could offer a credible alternative to market-centred, state-centred and culturalist explanations of the “Asian miracle”. The problem is that early regulationists’ attempts to do so had some apparent defects, particularly their pronounced tropism to analyse economic development along the lines of the “fordist model” and its success or failure.
But the “newly industrialised” Asian economies are obviously not the only possible target for such an analysis. Chavance and Magnin [2006] look into the institutional variety in Central and East-European countries to show that despite quite similar initial conditions before the
“transition to the market economy”, these countries do not form a homogenous group in the 2000s. While common post-socialist “path-dependent” features, institutional imitation, influence of the European Union and international organisations, and globalisation trends
13 Obviously, the adjectives might differ while making reference to similar phenomena. Albert [1991]distinguishes between neo-American (Anglo-Saxon) and neo-corporatist (Rhine model) whilst Hall and Soskice [2001]speak of “liberal” and “coordinated” market economies.
14 It is revealing that among Amable’s five capitalisms [2005], four types comprise European and other anglo- saxon countries (US, Canada, Autralia, NZ). The fifth type comprises the developed Asian nations (Asian capitalism).
have certainly been factors of convergence, there are also very important differences springing from specific historical events and endowments, but also from public policies and political choices, as well as possible preferences for the model of a particular “developed”
country. This is not to mention certain original institutional solutions found in an ad hoc way during the transition process. However, there are scholars who tend to insist more on the similarities among post-socialist countries. Bohle [2006], for example, stresses the dominance of trans-national capital and “passive” adaptation of the new EU member-states during the transformation process. Noelke and Vliegenthart [2009] have recently suggested the emergence of a specific group of Dependent Market Economies (DME) in Eastern and Central Europe. Given the dramatic impact of the current economic and financial crisis on these economies, the authors appear to have been overly optimistic about the coherence of the model and its sustainability. Nevertheless, their diagnosis concerning the centrality of the existing hierarchy between foreign headquarters of multinational companies and their subsidiaries located in Central and Eastern Europe seems correct. Such a situation induces fundamental dependence of these economies on the investment and production decisions made by trans-national corporations.
Given the existence of all this literature, the Russian case looks somewhat paradoxical. Whilst the Soviet economy was widely studied as a specific system, post-soviet Russia - despite the emergence of certain highly idiosyncratic properties - has hardly retained any attention at all as a specific type of capitalism. Of course, no attentive observer could miss the salient changes during Vladimir Putin’s second presidential term, but very little conceptual work has been done to account for them and to go further than qualifying them as "state capitalism",
"corporate state" or « strategic turning point »
15. These appreciations have most often turned out to be mere judgements of value and have not led to any systematic and systemic analysis.
There have been some exceptions, of course. Speaking of the consolidation of the Russian elites, David Lane [2008] suggests that the country has evolved in the direction of a corporate, cooperative, state-led capitalism. However, Lane’s analysis focuses on the changes in the economic policy and misses many original features of the post-soviet capitalism in Russia.
Indeed, as Jessop and Sum [2006] argue, state-led approaches assume that the political apparatus of the state is a kind of unified bloc, which is able to remain isolated and place itself above all the other social and economic agents. In reality, the situation appears to be much more nuanced with the key issue being the role of economic and political networks in policy- making and the 'governmentalization' of the Russian society.
We believe that the contemporary economic and political system in Russia is the original historical result of at least three distinct processes. Firstly, one should take into account the specific socio-economic transformation of post-Soviet Russia. Secondly, Russia’s international regime has been characterised by its extremely high dependence on the export of natural resources, the import of manufactured goods and liberalised capital movements.
Finally, the persistence of an obsolete but extensive manufacturing base inherited from the Soviet times continues to play a crucial role in the socio-economic and geographical organisation of the country. We will try to briefly describe and link these factors here by focusing on the “growth regime”, the dominant coordination mechanisms and the capital- labour nexus.
15 A. Illarionov, « When State Means Business », International Herald Tribune, January 25, 2006; Zlotowski [2006] ; J. Sapir [2007]
